Causes of Inflation

December 30, 1980

Economic theoreticians make complex what is really a very simple relationship. Inflation, if thought of as an increase in prices (which is really the symptom, not the cause) occurs when individual people decide that they would rather spend their money now than spend it later. Inflation subsides or reverses to deflation if those same individuals decide they would rather save their money to spend at a later time than to spend it now. This leads us to the following summary.

I. Rising prices result when individuals decide to spend now rather than save, that is, to spend now rather than later. They do this if they think they can make a better purchase now than they can make later. If they expect that their exchange of money for goods now is more favorable, this implies that in the future they expect that:

A. The value of their money will decrease, which would occur if: (1) The supply of money was increased (by printing more) and/or (2) The demand for money decreased, because yet more people decided to get rid of money in favor of goods (because of further expected decline in the value of money), and thus accelerated the trend toward spending rather than saving.and/orB. The value of goods will increase, which will occur if: (1) The supply of goods decreases, because (a) people consume more goods than previously, as often happens when inflation causes illusions of even greater wealth, and/or (b) goods are hoarded as inflation hedges or in anticipation of shortages, and/or (c) people produce fewer goods than previously, as also happens when production is not required by the transfer society, and/or (2) The demand for goods increases. This can be caused as illusions of wealth increase the standard of living, or as inflation expectations lead to searches for inflation hedges.

II. Falling prices occur when individuals decide to postpone purchases to a later date, that is, to save and favor money rather than goods. They do this when they think purchase at a later date will be more favorable. This decision will be based on an expectation that:

A. The value of their money will increase (either in absolute terms, or when combined with interest earnings). This will occur if (1) The supply of money decreases (as it is taken out of circulation by the issuing agency), and/or (2) The demand for money increases, as more people prefer a cash position, or as the total commerce increases and more money is needed. and/orB. The value of goods decreases because (1) The supply of goods increases because (a) people are more productive (working harder or more efficiently), and/or (b) goods previously hoarded are put back into the market, and/or (2) The demand for goods decreases, as people develop lower standards of living, or expect hard times and consume less at present, or expect no inflation and abandon their search for inflation hedges.

Thus we can see that, aside from speculation and the changing whims of people, which will always be with us, and which, together with the changing circumstances of life, will always bring business cycles with price changes, there are only two fundamental causes of the present excesses of inflation--printing too much money, and the declining productivity of people. Productivity requires work, which in most cases is seen as more unpleasant than non-work activities, such as recreation, arts, etc. Therefore people will not be more productive unless they see further production as necessary. So long as they receive transfer checks with which they can purchase the production of other people, they will not choose to become more productive. Therefore the only successful method of reversing our accelerating inflation will be to stop the printing of more paper dollars, which will force the reduction of transfer checks and manipulative schemes for confiscating the wealth of others, and thus force thousands of individuals back into positions where they are producing wealth. Too many of them are now in positions where they are supervising the confiscation and distribution of wealth produced by other men.